A good credit score can make a real difference in your life, whether it’s getting a loan, buying a car, or renting an apartment. According to Forbes, a good credit history saves about $35,000 for every $100,000 you borrow for a mortgage.
If you are trying to improve your credit score, it is important to know what a good credit score is and how to get one. This post will talk about what affects your credit score, how to improve it, and the best way to check your score.
The role of credit ratings in life
Before answering the question “what is a good credit score”, it is helpful to first understand how it affects your life.
Credit scores help lenders determine, on a fundamental level, whether to lend to an individual. According to Credit.com, credit scores “help lenders decide whether to [a person] good risk.” For example, a person’s credit score can determine the interest rate they receive on debt, the terms of the loan, and, most importantly, whether they can get a loan. But did you know that it can also mean a more expensive home or car insurance policy; Or pay more for the same amount of credit card debt?
Many people and institutions use credit to assess a person’s overall financial soundness. Thus, a credit score can affect:
- Can an individual buy a house.
- How expensive is it to buy a car.
- How willing are banks to let you open a checking or savings account.
What is a good credit score
Something as important as credit, you want to know exactly what good means. Fortunately, FICO makes the answer to the question “what is a good credit score” transparent. Your credit score is a number between 300 and 850, and Americans with a credit score above 670 have a “good” credit score.
However, as you streamline your finances and increase your net worth, it’s a good idea to aim for a credit score as close to 850 as possible. Not only does this mean more approvals, it will also free up more money in your budget to save on your child’s college or save and invest for retirement.
What affects your credit score
Despite their importance, only 21% of Americans have a good credit score. So if you find yourself missing payments or running into credit card debt because of keeping up with Jones, it’s time to assess your expenses. Understanding what goes into your credit score and its impact can help improve it. That’s all the parts of the recipe.
5 components that make up your assessment
Five main components make up your credit score. Each of these play a role in determining what credit score you will get and how low the interest rate on the loan can be.
- Payment History (35%): How often do you miss or default on your loan obligations.
- Total Debt (30%): how much of your total loan you have used
- Length of credit history (15%): how long did you use the loan
- Types of loans (10%): how diverse is your loan portfolio
- New Credit (10%): How many new credit accounts you have opened recently.
What information is not taken into account by credit ratings
Some things can seriously affect your credit score (such as a missed payment), while others don’t affect your credit score at all. Here is some information that credit agencies do not consider when determining your credit score:
- Pay with a gift card or debit card
- Change in salary
- Your marital status
- Rejection of a previous loan application
- Having accounts with high interest rates
- Ticket payment
- Moving money in your accounts
- Stocks, bonds, mutual funds or cryptocurrency investments
How to improve your score
Understanding “what a good credit score is” is the first step to improving it. Here are three real steps that will help you improve your score.
1. Get control over bill payments
Arranging bill payments so that each payment is made on time is one of the best ways to improve your score, as your payment history makes up the most significant percentage of your credit score. Some ways to gain control over bill payments:
- Create a budget: list your expenses and income on a piece of paper or on a computer. Then determine if you can meet each of your obligations. If not, turn off unnecessary things immediately, such as cable TV or satellite radio in your car.
- Set due date alerts: Many people miss paying bills because they forget the bill. An easy way to avoid this is to set up due date alerts on your calendar or phone to remind you to pay your bills on time.
- Automate bill payments. If you have regular bill payments (car payments, utilities, etc.), consider setting up automatic payments. The bank will withdraw money from your accounts and pay bills without worrying about it.
2. Don’t use all your credit
According to Value Penguin, “one of the factors that lenders consider when modeling an individual’s credit risk is credit utilization—the percentage of total available credit that a consumer uses on a monthly basis.”
Your credit utilization ratio refers to the portion of your credit limit that you are using at any given time. One way to control your credit usage is to pay your credit card balance in full at the end of each month. However, if this is not possible, it is prudent to keep the total outstanding balance at 30% or less of your credit limit.
One final strategy is to ask financial institutions to increase your credit limit. The worst thing they can say is no. A higher credit limit lowers the percentage of your current outstanding debt, helping your overall ratio.
3. Consider Debt Consolidation
If you have various sources of debt that need to be paid off, consider combining them all into one payment with a debt consolidation loan.
The benefits of a debt consolidation loan are that you no longer have to worry about making multiple payments and instead focus on one monthly deadline. In addition, if you can get a debt consolidation loan at a lower interest rate than your other significant loans, you will save money and take yourself one step closer to debt freedom.
Just be careful with debt consolidation fees as they can sometimes exceed 3% of the total loan amount.
The best way to check your account
Knowing “what a good credit score is” is important, but it’s useless if you don’t know what your current score is.
To get started, you can go to one of the three major credit bureaus to check your credit report for free. Your credit report contains your financial history. Your financial history includes all of your bills, any bankruptcy filings, how often you pay your bills on time, and any requests you have made. Three credit bureaus you can use to check your credit report:
- Equifax
- Experian
- TransUnion
However, it is important to note that your credit report is different from your credit score. To check your credit score with these three bureaus, you will need to pay a fee. Alternatively, you can visit a free credit scoring website to check your score (usually free with registration). Finally, you can also see your credit card provider for your credit score. Some credit card providers and banks offer the service of checking your credit score at no cost to you.
Why did your credit score change?
If you constantly monitor your credit score over time, you may notice that it fluctuates from time to time. Small changes in your credit score are regular and can happen for several reasons. Some of them:
- Differences between the three major credit bureaus
- The passage of time (deleting and adding new credit operations)
- Your Debt to Credit Ratio/Loan Utilization Ratio
- Different grading systems for different industries
- Change of information and updated information
Fluctuations in your credit are bound to happen, and as long as you keep making your payments on time, your account should recover. However, if you notice a significant unexpected drop in your score, it may be wise to contact one of the credit reference agencies to make sure that your report does not contain false information.
Summary: what is a good credit score and how to get it
Your credit affects every area of your life, from buying a house to banking and even buying a car. Therefore, it is important to understand what a good credit score is in order to set yourself up for financial success. Improving your credit score is the first step to getting more loans, building your financial reputation, and improving your financial health. And so, what are you waiting for?
This post originally appeared on Savoteur.